The S&P Downgrade

S&P announced tonight that it is downgrading the debt of the USA from AAA to AA+. It is the first time in modern days that American debt has not had the highest rating. Anyone who pays even a bit of attention to the spending levels of the federal government understands that in recent years, the total debt of the USA has exploded. In the two and a half years since Obama took office, America has added debt equal to about one-third of GDP and that the outlook for the future is for ever expanding debt levels. No one could be surprised that eventually one of the ratings agencies would issue the first downgrade. So now it has happened.

Two things struck me, however, as I read about the downgrade. First was the almost childish response by Obama and the Obamacrats. We got no statement of resolve from the president telling us that although the downgrade has happened, the nation will work through this and regain its triple A rating. We got no plan for dealing with the downgrade. Indeed, we got no rational respoonse to the downgrade at all. Instead, we got a statement in which the White House announced that the S&P action was based upon a math error. That's right. America now has debt equal to 100% of GDP with the prospect that debt will rise much faster than GDP over the next decade. No sane person would call that sort of debt situation an indicator of a triple A credit. Anyone who paid the slightest attention to the economy and the debt would know that a downgrade was inevitable. But to the White House, this was just the result of a math error. A MATH ERROR!!! Are they kidding?

Think of it this way. Let's assume that the supposed math error really exists and that because of it, the future debt of the USA is overstated by a trillion dollars. That would be major to say the least. But it would not make a difference in the long term outlook for the country. Indeed, the whole math error statement shows that Obama is more interested in avoiding blame for the downgrade than in dealing with the cause. He has no plan for the future, but he is sure that S&P is at fault for its math error.

The second thing that struck me was to wonder if this will impact the markets at all. Certainly, there has been no premium put into treasuries due to the potential for a downgrade. In the last few days, treasuries have gone up in price a bit while the other markets have plummeted. I doubt that to many investors will worry about the treasuries now that they are just AA+ rather than AAA.

One thing I do know, however: Monday is going to be interesting in the markets.